As expected, the run for the exits appears to have started as the global fiat currency regimes begin to crumble — starting with the Euro. Dealers for physical gold and silver bullion have been reporting capacity shortages for months now. This week’s explosive jump in gold to all time highs suggest that other durable commodity assets — including premium domains — should follow.
The Virtual wants to get Physical
To understand the magnitude of the problem with physical bullion, keep in mind that there are some reports that physical gold has been levered as much as 100:1. In other words, for every ounce of physical gold, there may be as many as 99 paper ounces that lay claim to that same physical ounce. Think of it as fractional reserve banking on steroids.
The use of levering is also what had made it possible for traders to take very large short positions. Like other commodities, it has historically not been common to take physical delivery. Rather it was normal to hold the commodity in its paper-equivalent form. After all, physical anything has to be securely stored, and in the case of precious metals, if it “disappears”, there is no paper trail to get it back!
What is going on now is a battle between the highly leveraged shorts and the increasingly finite available supply. As more owners take delivery, the supply that can be leveraged goes down. The largest of the shorts may well have bet their entire existence on containing a run on physical gold (and silver). The stakes could not be higher.
A Gold Moonshot and a Speculative attack on the Euro
The interesting development this week was the $1 Trillion Euro defense fund announced last Sunday before the markets opened in Tokyo on Monday morning. Speculators smelled a turkey shoot and have been shorting the Euro all week. The price of gold in Euros is a good indicator of what happened.
This is the price per ounce, denominated in Euros. However, the real crux of the problem is that virtual gold is priced the same as physical gold. Virtual gold can be created by shorting physical gold 100:1. While virtual gold is still available, physical gold increasingly is not.
You can see the problem very clearly at the micro level. Talk to your local coin shop. In fact, these dealers have known about this problem for months. Hence the deafening din of “Cash for gold” everywhere you look. Houston …. we have a supply problem.
A long legacy of asset inflation
The banking community uses the term “Hawk” to describe a central banker that is quick to act on signs of inflation. A “Dove” describes a central banker that has an “accommodative” stance towards inflation. Quantitative Easing — the creation of money by buying debt with newly-fomented debt — would be considered highly Dovish. Fed Chairman Bernanke is Dovish. The term “Helicopter Ben” refers to Bernanke’s academic banking concept of dropping money from helicopters to stimulate the economy out of Depression.
Before Bernanke, we had Alan Greenspan. Alan Greenspan’s tenure as Central Banker is legendary. It was also decidedly Dovish. Greenspan presided over the biggest financial bubble the world has ever seen, starting with his appointment to Fed Chairman in 1987. One of his first moves was a massive liquidity injection in 1987 in the wake of the Long Term Credit Management bailout. Greenspan went on to serve a record five terms during which we had record wealth creation.
Dovish tenure notwithstanding, what is interesting is that decades ago Greenspan had some pretty Hawkish ideas. Here is a quote that is widely attributed to Alan Greenspan way back in 1967 — long before Bretton Woods (1973):
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
In other words, abrogation of the Bretton Woods agreement — the unilateral decision by the US to take the dollar off of the gold standard — was one ballsy banker move. It worked. However, as you can see from the 1967 Greenspan quote, the central bankers were knowingly playing with fire.
Implications — It is approaching “too late” for gold. It is not too late for Domains.
The bottom line is that the central bankers know the score. Increasingly the public does too. Paper metals are not really a viable hedge, and physical metals have their challenges. This is why I am increasingly convinced that domain names for wealth preservation makes sense. Here’s why:
- Rare: There is a significant but finite number of development-worthy com and net domain names.
- High value to weight: Domains can be easily transported — virtually and in real-time
- Traceable: There is only one of each name. It is impossible to “counterfeit” a domain. If your name goes missing, there is a process for recovering it.
- Intrinsic value: Domains are the raw land of the Internet — the increasingly dominant platform for communication, commerce and community.
This is not to suggest that domains be a primary store of wealth, though for many domainers that is probably the case. The point is that high quality, professionally managed, domains are a viable component of a balanced investment portfolio.
Spot on, it’s true physical Gold is in short supply, it’s an industry I know well, Domain’s offer a viable investment alternative for the reasons you have already outlined, I am sure this year will prove to be a bumper year for Domain Sales.
Rob, I responded to your last discussion of the financial markets saying the VIX would jump over 30 this time around (it did) although it has subsided in the mid 20s. Could be fireworks next week as SPY failed the 50 DMA.
Very few people in the domain industry understand how valuable domains really are in relation to fiat currencies and gold. I remember about 6 months ago or so Michael Berkins made a post about what would appreciate more, Google’s stock or gold. Ofcourse all domainers chose google stock, when gold was the more reasonable answer to me. He followed up on the poll when Google share price went up to the 600’s and gold went down to around $1,000, but has not followed up since. Gold has greatly outperformed since he originally launched the poll.
One thing that I think is incorrect in your post. The blowup of LTCM was in 1998, not in ’87 when Greenspan took over. However, Gspan lowered rates (and perhaps caused the internet bubble by keeping them too low for too long) because of the blowup of LTCM and the asian crisis.
If the Fed doesn’t raise rates soon than there are going to be some serious inbalances in the economy that could have dramatic consequences resulting in social unrest.